Chicago Rivet & Machine Co. — Q1 2018 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited three months ended March 31, 2018, compared with the three months ended March 31, 2017. Chicago Rivet manufactures and sells rivets, cold-formed fasteners, screw-machine products, automatic rivet-setting machines, parts, and related tools. Operations are organized into Fastener and Assembly Equipment segments, with significant exposure to the automotive industry.
The company adopted ASC Topic 606, Revenue from Contracts with Customers, effective January 1, 2018, using the modified retrospective method. Adoption did not materially affect revenue recognition, financial position, results of operations, or beginning retained earnings.
Financial results and key metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $10.012 million | $9.483 million | Up 5.6% |
| Gross profit | $2.343 million | $2.257 million | Up 3.8% |
| Gross margin | 23.4% | 23.8% | Down approximately 40 basis points |
| Operating profit | $878,287 | $750,239 | Up 17.1% |
| Operating margin | 8.8% | 7.9% | Improved |
| Income before taxes | $911,788 | $770,922 | Up 18.3% |
| Net income | $707,788 | $510,922 | Up 38.5% |
| Net margin | 7.1% | 5.4% | Improved |
| Basic and diluted EPS | $0.73 | $0.53 | Up $0.20 |
| Cash dividends declared per share | $0.51 | $0.55 | Down $0.04 |
- Fastener revenue increased 2.2% to $8.925 million. Segment gross profit declined to $1.977 million from $2.033 million because higher material costs more than offset tooling savings of approximately $123,000.
- Assembly Equipment revenue increased 45.4% to $1.087 million, primarily because of a high-dollar machine shipment. Segment gross profit increased to $366,365 from $223,697.
- Selling and administrative expense declined 2.8% to $1.465 million, partly because the prior-year period included approximately $77,000 of ERP upgrade costs. The expense ratio improved to 14.6% from 15.9%.
- Other income increased to $33,501 from $20,683, primarily from higher interest income on certificates of deposit.
- The effective tax rate declined to approximately 22.4% from 33.7%, reflecting the Tax Cuts and Jobs Act and the reduction in the federal corporate tax rate. Management estimated that the law reduced first-quarter income tax expense by approximately $101,000.
Cash flow, liquidity, debt, and balance sheet
- Net cash provided by operating activities was $214,501, compared with $140,506 of operating cash used in Q1 2017.
- Capital expenditures were $225,000, compared with $175,462 in the prior-year period.
- Cash dividends paid were $492,727. The $0.51 per-share dividend included a regular quarterly dividend of $0.21 and an additional $0.30 dividend related to strong 2017 operating results.
- Cash and cash equivalents declined to $898,643 from $1.153 million at December 31, 2017. Certificates of deposit were $7.561 million, compared with $7.810 million; combined cash, cash equivalents, and certificates of deposit were approximately $8.5 million versus $9.0 million at year-end.
- Working capital was approximately $17.3 million, up approximately $0.3 million from the beginning of the year. Accounts receivable increased by $1.4 million due to greater sales activity, while accounts payable increased by $0.9 million.
- Total assets were $32.607 million and shareholders’ equity was $29.075 million at March 31, 2018.
- The filing presents no outstanding borrowings or debt balance; total liabilities were $3.532 million, consisting primarily of current liabilities and deferred income taxes.
- Management believes existing cash, cash equivalents, and operating cash flow will provide adequate working capital for the next twelve months.
Material changes, outlook, and risks
Management reported improved sales and net income, with a positive near-term outlook. Fastener demand remained stable and was supported by a healthy domestic automotive market. The Assembly Equipment segment had a growing machine-order backlog expected to support near-term activity.
Steel prices, the company’s primary raw-material cost, increased during the quarter and are expected to rise further, creating pressure on gross margins. Management plans to emphasize cost controls, operating efficiencies, and new sales opportunities.
- Key disclosed risks include dependence on the domestic automotive industry, customer concentration, intense competition, export risks, raw-material price and availability, labor-relations issues, product liability and warranty or recall claims, environmental compliance costs, loss of key employees, and difficulty achieving cost savings.
- The company is involved from time to time in litigation, including environmental claims and contract disputes. Management believes unprovided liabilities will not have a material adverse effect, although the ultimate amounts cannot currently be determined.
- Federal tax returns for 2014 through 2017 and state tax returns for 2014 through 2017 remain subject to examination. Management does not anticipate a material adjustment.
- Interim results are not necessarily indicative of full-year results. The filing provides no quantified full-year revenue or earnings guidance.
- Management reported that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether higher steel and other material costs continue to compress Fastener segment margins.
- The timing, size, and profitability of the Assembly Equipment backlog and whether the first-quarter high-dollar shipment is repeatable.
- Accounts receivable growth and resulting operating cash conversion.
- Customer concentration and exposure to changes in domestic automotive production.
- The sustainability of the lower effective tax rate following the Tax Cuts and Jobs Act.
- Future dividend policy, including whether additional dividends recur.
- Developments in litigation, environmental matters, warranty or recall claims, and tax examinations.